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Merrill Lynch Reg BI plans: Cut funds, preserve brokerage

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Merrill Lynch unveiled its strategy to comply with the SEC’s Regulation Best Interest: Cut a small number of funds from its platform and boost disclosures while remaining committed to offering clients brokerage and advisory services.

“Preserving access to brokerage and ensuring that client choice exists as a core principle — that has been very central to the way we have been thinking about it,” says a Merrill Lynch executive who spoke on condition of anonymity.

Compared to the Herculean efforts required by brokerage firms to comply with the Department of Labor’s now-defunct fiduciary rule, it’s a relatively more modest undertaking to comply with the regulatory package that consists of Reg BI and Form CRS. In 2016, Merrill Lynch said it would eliminate commission-based brokerage in retirement accounts (it later changed course on this policy). Back then, Merrill and other firms also made a number of changes, which included culling a large number of funds from their platforms.

To align with the SEC’s Reg BI, Merrill Lynch is cutting some — but a relatively modest — number of funds: about 2% of the roughly 2,000 available to brokerage clients, according to executives familiar with the matter who asked not to be named. The funds set to be eliminated tend to fall into niche categories.

Among other changes, Merrill Lynch will cap front-end loads on mutual funds at 3.5%. Prospectuses for some mutual funds on its platform permit higher loads, though clients have not aren’t necessarily been charged a higher fee, executives say.

The company will also provide enhanced disclosures to clients as well as training for financial advisors to prepare them for Reg BI’s June 30 enforcement start date. Given the ongoing coronavirus pandemic, the training will be delivered via video conferencing, online and other means that don’t require in-person meetings.

Few if any of the changes will affect clients enrolled in Merrill’s investment advisory program. More than 80% of the wirehouse’s clients are currently enrolled in the program.

Even as the firm makes these changes, more could be on the horizon. Massachusetts’ state regulator has enacted its own fiduciary rule and other states have indicated that they will do likewise. Massachusetts will begin enforcing its fiduciary regulation Sept. 1.

The Merrill Lynch executives say they are monitoring the situation.

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